Mean Street: The Coming Smartphone Bloodbath

By Deal Journal

Apple just launched the 3G iPhone. Nokia acquired the remainder of Symbian it didn’t already own. And shortly, Research in Motion will introduce its latest and greatest phone, called the Bold.

All that competition is one of the reasons why RIM shares have cratered more than 15% since Thursday, after the company warned of weaker future earnings. As the company’s co-CEO Jim Balsillie admitted to investors, the smartphone market is in its “land grab” phase. But it is worse than many think. There is plenty of evidence that a smartphone bloodbath is on its way.

Let’s go to the numbers:

Number of global handset makers: More than 30.
Number of serious contenders for the global smartphone market: 10.

There are just too many players in the scramble for the smartphone market. Some will win. Some will lose. But it isn’t easy to simply exit the handset business. It took Siemens years to unload its business to BenQ. Sony and Ericsson ended up in a joint venture. And look at Motorola’s slow death.

Handset units expected to be sold in 2009: 1.35 billion.
Smartphone units expected to be sold in 2009: 270 million.

The handset industry knows its future is in smartphones. Unit sales in the overall handset market are increasing only about 10% a year. The smartphone market is expanding at five times that rate.

According to Piper Jaffrey, smartphones may soon account for 20% of the overall handset market. Can you say cannibalization? That means one direction for handset and smartphone prices–and it isn’t up.

Apple aimed squarely for the mass market with its recent launch of the 3G iPhone. RIM will follow suit with an aggressive launch of Bold. And when Nokia shows up in early 2009 with its comparable iPhone offering, you shouldn’t expect the company to be timid.

At least, those three need to deliver profits to their investors. The Asian competitors–Samsung, LG, Huawei, ZTE and HTC–will accept narrower profit margins in order to take market share. Consider the pricing strategy of Korean auto makers to build share in the U.S. Or how much an LG handset costs at the local Verizon store.

Number of smartphone operating systems: 7.
Number of computer operating systems: 3.

Profits will also be hard to come by as there are too many smartphone operating systems vying for supremacy. Nokia bought up the rest of Symbian to gird for this battle.

The smartphone makers will encounter enormous R&D costs and a raft of technical hiccups as the standards evolve. They also will be forced to throw money at the applications developers to get them to adopt their platform.

Retail price of Apple 3G iPhone handset: $199.
Price of AT&T Apple 3G iPhone service package: $360 a year for data plus $720 a year for voice.
Average revenue per cellphone user in the U.S.: approximately $600 a year.

As for the customers. They love smartphones–at the right price. Customers don’t have unlimited budgets for both the smartphone and the service.

It will cost most AT&T iPhone customers more than $1,200 a year for the handset and the service–twice what the average US cellphone customer pays today. That is why AT&T subsidizes the handset–to encourage smartphone adoption and heavier use. But as smartphone penetration rises, the pressure on carriers to reduce their voice and data prices will rise as well.

To protect their profits, carriers will be less willing to heavily subsidize the smartphones, and fewer subsidies for smartphone makers means lower profits.

The smartphone makers want to make the carrier customers, first and foremost, their customers. Apple wants the iPhone user to use Apple’s applications and billing platform. The carriers want to retain control of their customer base. Do you think AT&T and Verizon Wireless like that their customers often identify the carriers’ service as “my Blackberry” or “my iPhone?”

Watch as the carriers and smartphone makers tussle over subsidies, applications revenue, marketing programs and billing platforms. This has been the dynamic for years, and it will only get worse given the proliferation in smartphone applications.

Number of personal computer makers in the early 1990s: About 30.
Number of big PC makers today: 9.

The smartphone industry will experience explosive growth and furious competition. But just as with the PC industry, there will be only a few winners left standing at the end of the day.

In 10 years, the likely survivors: Nokia, Apple, RIM and a few Asian makers. But the analyst models and share prices for Nokia, Apple and RIM aren’t pricing in just how messy the smartphone market may get in the meantime.

And if the history of technological innovation is any guide, you better put your waders on. There is a bloodbath coming.

The biggest smartphone markets are emerging in SE Asia - There would be few players no doubt like Nokia, RIM, Apple, LG & perhaps newer entrants like the 'yet to be released' Velocity Mobile if they get their finances in order. It not about getting your technology right - its about keeping their finances in smooth flow. I see the above doing well in the future. The smartphones need to be cheaper though. The subsidies game would make the customers pay more !! Technology needs to be state of the art - Nokia E71 has set new standards for this !! So its the tech wizardry n penchant for managing the Euros and the Benjamins that would ultimately decide the fate of the smartphone players.

8:34 pm July 9, 2008

TruthSeeker wrote :

Apple makes toys for children to play with. Rim and Nokia make phones for people who need to get things done. When the children who buy Iphones get a job, they'll have to stop playing with toys.

1:20 pm June 30, 2008

Anonymous wrote :

I expect Symbian to fail in a couple of years the same way GSM has failed: the opinion of its failure dominates among tech pundits while it is used only on some uninteresting 80% of non-U.S. devices in the world :)

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